UNISOURCE ENERGY CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From __________ to __________.

Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification Number
----------- ----------------------------------- ---------------------

1-13739 UNISOURCE ENERGY CORPORATION 86-0786732
(An Arizona Corporation)
One South Church Avenue, Suite 100
Tucson, AZ 85701
(520) 571-4000

1-5924 TUCSON ELECTRIC POWER COMPANY 86-0062700
(An Arizona Corporation)
One South Church Avenue, Suite 100
Tucson, AZ 85701
(520) 571-4000

Indicate by check mark whether each registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X__ No ____

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
UniSource Energy Corporation Yes _X__ No ____
Tucson Electric Power Company Yes ____ No _X__

At May 4, 2004, 34,143,167 shares of UniSource Energy Corporation's
Common Stock, no par value (the only class of Common Stock), were outstanding.

At May 4, 2004, 32,139,555 shares of Tucson Electric Power Company's
common stock, no par value, were outstanding, of which 32,139,434 were held by
UniSource Energy Corporation.

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This combined Form 10-Q is separately filed by UniSource Energy Corporation and
Tucson Electric Power Company. Information contained in this document relating
to Tucson Electric Power Company is filed by UniSource Energy Corporation and
separately by Tucson Electric Power Company on its own behalf. Tucson Electric
Power Company makes no representation as to information relating to UniSource
Energy Corporation or its subsidiaries, except as it may relate to Tucson
Electric Power Company.

TABLE OF CONTENTS

Page
Definitions...................................................................iv
Report of Independent Accountants..............................................1

PART I - FINANCIAL INFORMATION

Item 1. - Financial Statements
UniSource Energy Corporation
Comparative Condensed Consolidated Statements of Income.................2
Comparative Condensed Consolidated Statements of Cash Flows.............3
Comparative Condensed Consolidated Balance Sheets.......................4
Condensed Consolidated Statement of Changes in Stockholders' Equity.....5
Tucson Electric Power Company
Comparative Condensed Consolidated Statements of Income.................6
Comparative Condensed Consolidated Statements of Cash Flows.............7
Comparative Condensed Consolidated Balance Sheets.......................8
Condensed Consolidated Statement of Changes in Stockholders' Equity.....9
Notes to Condensed Consolidated Financial Statements
Note 1. Nature of Operations, Basis of Accounting Presentation and
Equity-Based Compensation.......................................10
Note 2. Proposed Acquisition of UniSource Energy........................11
Note 3. Regulatory Matters..............................................12
Note 4. TEP Credit Facility.............................................13
Note 5. Accounting Change: Accounting for Asset Retirement Obligations.14
Note 6. Accounting for Derivative Instruments and Trading Activities....14
Note 7. Business Segments...............................................15
Note 8. Millennium .....................................................16
Note 9. Commitments and Contingencies...................................18
Note 10. TEP Wholesale Accounts Receivable and Allowances................21
Note 11. UniSource Energy Earnings per Share (EPS).......................21
Note 12. Employee Benefits Plans.........................................22
Note 13. Equity-Based Compensation Plans.................................22
Note 14. Income and Other Taxes..........................................24
Note 15. New Accounting Pronouncements...................................25
Note 16. Supplemental Cash Flow Information..............................26
Note 17. Review by Independent Accountants...............................27

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of Consolidated Business.........................................28
UniSource Energy Consolidated
Results of Operations..................................................30
Contribution by Business Segment.......................................31
Liquidity and Capital Resources........................................31
Tucson Electric Power Company
Results of Operations..................................................33
Factors Affecting Results of Operations................................35
Liquidity and Capital Resources...............................................37

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TABLE OF CONTENTS
(concluded)

UniSource Energy Services
Results of Operations..................................................39
Factors Affecting Results of Operations................................40
Liquidity and Capital Resources........................................41
Millennium Energy Holdings, Inc.
Results of Operations..................................................42
Liquidity and Capital Resources........................................43
Critical Accounting Policies..............................................44
New Accounting Pronouncements.............................................49
Safe Harbor for Forward-Looking Statements................................50

Item 3. - Quantitative and Qualitative Disclosures about Market Risk........51

Item 4. - Controls and Procedures...........................................53

PART II - OTHER INFORMATION

Item 1. - Legal Proceedings.................................................54
Item 4. - Submission of Matters to a Vote of Security Holders...............54
Item 5. - Other Information
Additional Financial Data.................................................55
Non-GAAP Measure..........................................................55
SEC Reports Available on UniSource Energy's Website.......................56

Item 6. - Exhibits and Reports on Form 8-K..................................57

Signatures....................................................................57

Exhibit Index.................................................................58

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DEFINITIONS

The abbreviations and acronyms used in the 2004 First Quarter 10-Q are defined
below:
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ACC.............................. Arizona Corporation Commission.
ACC Holding Company Order........ The order approved by the ACC in November
1997 allowing TEP to form a holding
company.
AHMSA............................ Altos Hornos de Mexico, S.A. de C.V. AHMSA
owns 50% of Sabinas.
AMT.............................. Alternative Minimum Tax.
Btu.............................. British thermal unit(s).
Capacity......................... The ability to produce power; the most
power a unit can produce or the maximum
that can be taken under a contract;
measured in MWs.
CISO............................. California Independent System Operator.
Citizens......................... Citizens Communications Company.
Citizens Settlement Agreement.... An agreement with the ACC Staff dated
April 1, 2003, addressing rate case and
financing issues in the acquisition by
UniSource Energy of the Citizens'
Arizona gas and electric assets.
Common Stock..................... UniSource Energy's common stock, without
par value.
Company or UniSource Energy...... UniSource Energy Corporation.
CPX.............................. California Power Exchange.
Credit Agreement................. Credit Agreement between TEP and a
syndicate of lenders, dated as of March
25, 2004.
Emissions Allowance(s)........... An allowance issued by the Environmental
Protection Agency which permits emission
of one ton of sulfur dioxide or one ton
of nitrogen oxide. These allowances can
be bought and sold.
Energy........................... The amount of power produced over a given
period of time; measured in MWh.

FAS 71 ........................ Statement of Financial Accounting
Standards No. 71: Accounting for the
Effects of Certain Types of Regulation.
FAS 132.......................... Statement of Financial Accounting
Standards No. 132: Employers'
Disclosures about Pensions and Other
Postretirement Benefits.
FAS 133.......................... Statement of Financial Accounting
Standards No. 133: Accounting for
Derivative Instruments and Hedging
Activities.
FAS 143.......................... Statement of Financial Accounting
Standards No. 143: Accounting for Asset
Retirement Obligations.
FAS 149.......................... Statement of Financial Accounting
Standards No. 149: Amendment of
Statement 133 on Derivative Instruments
and Hedging Activities.
FERC............................. Federal Energy Regulatory Commission.
First Collateral Trust Bonds..... Bonds issued under the Indenture of Trust,
dated as of August 1, 1998, of TEP to
the Bank of New York, successor trustee.
First Mortgage Bonds............. First mortgage bonds issued under the
Indenture dated as of April 1, 1941, of
TEP to JPMorgan Chase Bank, successor
trustee, as supplemented and amended.
Four Corners..................... Four Corners Generating Station.
GAAP............................. Generally Accepted Accounting Principles.
Global Solar..................... Global Solar Energy, Inc., a company that
develops and manufactures thin-film
photovoltaic cells. Millennium owns 99%
of Global Solar.
Haddington....................... Haddington Energy Partners II, LP, a
limited partnership that funds
energy-related investments
Heating Degree Days.............. An index used to measure the impact of
weather on energy usage calculated by
subtracting the average of the high and
low daily temperatures from 65.
IDBs............................. Industrial development revenue or
pollution control revenue bonds.
IPS.............................. Infinite Power Solutions, Inc., a company
that develops thin-film batteries.
Millennium owns 72% of IPS.
IRS.............................. Internal Revenue Service.
ISO.............................. Independent System Operator.
ITN.............................. ITN Energy Systems, Inc. was formed to
provide research, development, and other

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services. Millennium exchanged its
ownership of ITN for increased ownership
of Global Solar and currently owns no
interest in ITN.
ITC.............................. Investment tax credit.
kWh.............................. Kilowatt-hour(s).
kV............................... Kilovolt(s).
LIBOR............................ London Interbank Offered Rate
LOC.............................. Letter of Credit.
MEG.............................. Millennium Environmental Group, Inc., a
wholly-owned subsidiary of Millennium,
which manages and trades emission
allowances, coal, and related financial
instruments.
MicroSat......................... MicroSat Systems, Inc. is a company
formed to develop and commercialize
small-scale satellites. Millennium
currently owns 35%.
Millennium....................... Millennium Energy Holdings, Inc., a
wholly-owned subsidiary of UniSource
Energy.
Mimosa........................... Minerales de Monclova, S.A. de C.V., an
owner of coal and associated gas
reserves and a supplier of metallurgical
coal to the steel industry and thermal
coal to the Mexican electricity
commission. Sabinas owns 19.5% of
Mimosa.
MMBtus........................... Million British Thermal Units.
MW............................... Megawatt(s).
MWh.............................. Megawatt-hour(s).
Navajo........................... Navajo Generating Station.
NOL.............................. Net Operating Loss carryback or
carryforward for income tax purposes.
PGA.............................. Purchased Gas Adjuster, a retail rate
mechanism designed to recover the cost
of gas purchased for retail gas
customers.
PNM.............................. Public Service Company of New Mexico.
Powertrusion..................... POWERTRUSION International, Inc., a
company owned 77% by Millennium, which
manufactures lightweight utility poles.
PPFAC............................ Purchase Power and Fuel Adjustor Clause.
PWCC............................. Pinnacle West Capital Corporation.
Revolving Credit Facility........ $60 million revolving credit facility
entered into under the Credit Agreement
between a syndicate of banks and TEP.
RTO.............................. Regional Transmission Organization.
Rules............................ Retail Electric Competition Rules.
Sabinas.......................... Carboelectrica Sabinas,S. de R.L. de C.V.,
a Mexican limited liability company.
Millennium owns 50% of Sabinas.
Saguaro Utility.................. An Arizona limited partnership, whose
general partner is Sage Mountain,
L.L.C. and whose limited partners
include investment funds affiliated with
Kohlberg Kravis Roberts & Co., L.P.,
J.P. Morgan Partners, L.L.C. and
Wachovia Capital Partners.
San Juan......................... San Juan Generating Station.
Second Mortgage Bonds............ TEP's second mortgage bonds issued under
the Indenture of Mortgage and Deed of
Trust, dated as of December 1, 1992, of
TEP to the Bank of New York, successor
trustee, as supplemented.
SCE.............................. Southern California Edison Company.
SES.............................. Southwest Energy Solutions, Inc., a
wholly-owned subsidiary of Millennium.
Springerville.................... Springerville Generating Station.
Springerville Coal Handling
Facilities Leases.............. Leveraged lease arrangements relating to
the coal handling facilities serving
Springerville.
Springerville Common
Facilities..................... Facilities at Springerville used in common
with Springerville Unit 1 and
Springerville Unit 2.
Springerville Common
Facilities Leases.............. Leveraged lease arrangements relating to
an undivided one-half interest in
certain Springerville Common Facilities.
Springerville Unit 1............. Unit 1 of the Springerville Generating
Station.
Springerville Unit 1 Lease....... Leveraged lease arrangement relating to
Springerville Unit 1 and an undivided
one-half interest in certain
Springerville Common Facilities.
Springerville Unit 2............. Unit 2 of the Springerville Generating
Station.
Sundt Generating Station......... H. Wilson Sundt Generating Station
(formerly known as the Irvington

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Generating Station).
Sundt Lease...................... The leveraged lease arrangement relating
to Sundt Unit 4.
TEP.............................. Tucson Electric Power Company, the
principal subsidiary of UniSource
Energy.
TEP Settlement Agreement......... TEP's Settlement Agreement approved by the
ACC in November 1999 that provided for
electric retail competition and
transition asset recovery.
Therm............................ A unit of heating value equivalent to
100,000 British thermal units (Btu).
Tri-State........................ Tri-State Generation and Transmission
Association.
TruePricing...................... TruePricing, Inc., a start-up company
established to market energy related
products.
UED.............................. UniSource Energy Development Company, a
wholly-owned subsidiary of UniSource
Energy, which engages in developing
generation resources and other project
development services and related
activities.
UES.............................. UniSource Energy Services, Inc., an
intermediate holding company established
to own the operating companies (UNS Gas
and UNS Electric) which acquired the
Citizens Arizona gas and electric
utility assets.
UniSource Energy................. UniSource Energy Corporation.
UNS Electric..................... UNS Electric, Inc., a wholly-owned
subsidiary of UES, which acquired the
Citizens Arizona electric utility
assets.
UNS Gas.......................... UNS Gas, Inc., a wholly-owned subsidiary
of UES, which acquired the Citizens
Arizona gas utility assets.
WestConnect...................... The proposed for-profit RTO in which TEP
is a participant.

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Report of Independent Accountants

Report of Independent Accountants

To the Board of Directors and Stockholders of
UniSource Energy Corporation and
to the Board of Directors of
Tucson Electric Power Company

We have reviewed the accompanying condensed consolidated balance sheet of
UniSource Energy Corporation and its subsidiaries (the Company) and Tucson
Electric Power Company and its subsidiaries (TEP) as of March 31, 2004 and the
related condensed consolidated statements of income and of cash flows for each
of the three-month periods ended March 31, 2004 and 2003 and the condensed
consolidated statement of changes in stockholders' equity for the three-month
period ended March 31, 2004. These financial statements are the responsibility
of the Company's and TEP's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet and statement of
capitalization of the Company and TEP as of December 31, 2003, and the related
consolidated statements of income, of changes in stockholders' equity, and of
cash flows for the year then ended (not presented herein), and in our report
dated February 20, 2004 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheets as of December 31, 2003
are fairly stated in all material respects in relation to the consolidated
balance sheets from which they have been derived.

Los Angeles, California
May 3, 2004

1

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
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2

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UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

4

UNISOURCE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. NATURE OF OPERATIONS, BASIS OF ACCOUNTING PRESENTATION AND EQUITY-BASED
COMPENSATION
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UniSource Energy Corporation (UniSource Energy) is an exempt holding
company under the Public Utility Holding Company Act of 1935. UniSource Energy
has no significant operations of its own, but owns 99.9% of the common stock of
Tucson Electric Power Company (TEP) and all of the common stock of UniSource
Energy Services, Inc. (UES), Millennium Energy Holdings, Inc. (Millennium) and
UniSource Energy Development Company (UED).

TEP, a regulated public utility incorporated in Arizona since 1963, is
UniSource Energy's largest operating subsidiary and represented approximately
85% of UniSource Energy's assets as of March 31, 2004. TEP generates, transmits
and distributes electricity. TEP serves approximately 369,000 retail electric
customers in a 1,155 square mile area in Pima and Cochise counties in Southern
Arizona. TEP also sells electricity to other utilities and power marketing
entities primarily located in the western U.S.

UES has no significant operations of its own, but owns all of the
common stock of UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (UNS Electric).
On August 11, 2003, UniSource Energy completed the purchase of the Arizona gas
and electric system assets from Citizens Communications Company (Citizens) and
established two new operating companies, UNS Gas and UNS Electric, to acquire
these assets, as well as an intermediate holding company, UES, to hold the
common stock of UNS Gas and UNS Electric. The operating results of UNS Gas, UNS
Electric, and UES have been included in UniSource Energy's consolidated
financial statements since the acquisition date. UNS Electric procures,
transmits and distributes electricity to approximately 82,000 retail electric
customers in the Mohave county of Northern Arizona and the Santa Cruz county of
Southern Arizona. UNS Gas procures, transports and distributes natural gas to
approximately 129,000 customers in Mohave, Yavapai, Coconino, and Navajo
counties in Northern Arizona and Santa Cruz county in Southern Arizona.

Millennium's unregulated businesses are described in Note 8 and UED's
services are described in Note 7.

References to "we" and "our" are to UniSource Energy and its
subsidiaries, collectively.

The accompanying quarterly financial statements of UniSource Energy and
TEP are unaudited but reflect all normal recurring accruals and other
adjustments which we believe are necessary for a fair presentation of the
results for the interim periods presented. These financial statements are
presented in accordance with the Securities and Exchange Commission's (SEC)
interim reporting requirements which do not include all the disclosures required
by accounting principles generally accepted in the United States of America
(GAAP) for audited annual financial statements. The year-end condensed balance
sheet data was derived from audited financial statements, but does not include
disclosures required by GAAP for audited annual financial statements. This
quarterly report should be reviewed in conjunction with UniSource Energy and
TEP's 2003 Annual Report on Form 10-K.

Weather, among other factors, causes seasonal fluctuations in TEP and
UES' sales; therefore, quarterly results are not indicative of annual operating
results. UniSource Energy and TEP have made minor reclassifications to the prior
year financial statements for comparative purposes. These reclassifications had
no effect on net income.

EQUITY-BASED COMPENSATION

UniSource Energy has two equity-based compensation plans, the 1994
Outside Director Stock Option Plan (Directors' Plan) and the 1994 Omnibus Stock
and Incentive Plan (Omnibus Plan). See Note 13. We account for those plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations.

Our stock options are granted with an exercise price equal to the
market value of the stock at the date of the grant. Accordingly, no compensation
expense is recorded for these awards. However, compensation expense is
recognized for restricted stock, stock unit and performance share awards over
the performance/vesting period.

The following table illustrates the effect on UniSource Energy's net
income and earnings per share and TEP's net income as if we had applied the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, to all equity-based employee
compensation awards:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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TEP:
---

The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. There were no stock options
granted in the first quarter of 2004. For the 21,222 options granted under the
Directors' Plan in 2003, the following weighted average assumptions were used:

NOTE 2. PROPOSED ACQUISITION OF UNISOURCE ENERGY
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At a special meeting held on March 29, 2004, UniSource Energy's
shareholders voted to approve an acquisition agreement UniSource Energy entered
into on November 21, 2003 with Saguaro Acquisition Corp., a wholly-owned
indirect subsidiary of Saguaro Utility Group L.P. (Saguaro Utility), providing
for the acquisition of all of the common stock of UniSource Energy for $25.25
per share by an affiliate of Saguaro Utility. The acquisition agreement provides
that Saguaro Acquisition Corp. will merge with and into UniSource Energy, with
UniSource

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Energy surviving the merger as a wholly-owned indirect subsidiary of
Saguaro Utility. Upon consummation of the acquisition, Saguaro Utility will
cause the surviving corporation to pay approximately $880 million in cash to
UniSource Energy's shareholders and holders of stock options, stock units,
restricted stock and performance shares awarded under our stock based
compensation plans. In connection with the closing of the acquisition, Saguaro
Utility intends to cause the surviving corporation (i) to repay the $95 million
inter-company loan to UniSource Energy from TEP and (ii) to contribute up to
$168 million to TEP. TEP will use a significant portion of these proceeds to
retire some of its outstanding debt. UniSource Energy expects the acquisition,
which is subject to several conditions, including receipt of certain regulatory
approvals, to occur in the second half of 2004.

The acquisition agreement contains operating covenants with respect to the
operations of UniSource Energy's business pending the consummation of the
acquisition. Generally, unless UniSource Energy obtains Saguaro Acquisition
Corp.'s prior written consent, UniSource Energy must conduct business in the
ordinary course consistent with past practice and use all commercially
reasonable efforts to preserve substantially intact the present business
organization and present regulatory, business and employee relationships. In
addition, the acquisition agreement restricts certain activities, subject to the
receipt of Saguaro Acquisition Corp.'s prior written consent, including the
issuance or repurchase of capital stock, the amendment of organizational
documents, acquisitions and dispositions of assets, capital expenditures,
incurrence of indebtedness, modification of employee compensation and benefits,
changes in accounting methods, discharge of liabilities, and matters relating to
UniSource Energy's investment in Millennium.

Either UniSource Energy or Saguaro Acquisition Corp. may terminate the
acquisition agreement in certain circumstances, including if the acquisition is
not consummated by March 31, 2005 or certain regulatory approvals are not
obtained. In certain circumstances, upon the termination of the acquisition
agreement, UniSource Energy would be required to pay Saguaro Acquisition Corp.'s
expenses related to the acquisition agreement and a termination fee in an
aggregate amount of up to $25 million.

An affiliate of Saguaro Utility entered into a $410 million credit
agreement on March 25, 2004 that will be funded upon closing of the acquisition
of UniSource Energy. The credit agreement includes a $50 million revolving
credit facility for general corporate purposes and a $360 million term loan to
be used to fund a portion of the acquisition. The lenders' obligation to make
such loans are subject to various customary closing conditions.

The March 29, 2004 shareholder vote to approve the proposed merger
triggered vesting of all outstanding stock options under the Omnibus Plan, but
no additional compensation expense resulted from such vesting. See Note 13 for a
description of additional compensation expense recorded for the performance
shares due to accelerated vesting of the awards as a result of the March 29,
2004 shareholder vote.

NOTE 3. REGULATORY MATTERS
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REGULATORY ACCOUNTING

TEP and UES generally use the same accounting policies and practices
used by unregulated companies for financial reporting under GAAP. However,
sometimes these principles, such as Statement of Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71),
require special accounting treatment for regulated companies to show the effect
of regulation. For example, in setting TEP's and UES' retail rates, the Arizona
Corporation Comission (ACC) may not allow TEP or UES to currently charge their
customers to recover certain expenses, but instead requires that these expenses
be charged to customers in the future. In this situation, FAS 71 requires that
TEP and UES defer these items and show them as regulatory assets on the balance
sheet until TEP and UES are allowed to charge their customers. TEP and UES then
amortize these items as expense to the income statement as these charges are
recovered from customers. Similarly, certain revenue items may be deferred as
regulatory liabilities, which are also eventually amortized to the income
statement as rates to customers are reduced.

The conditions a regulated company must satisfy to apply the accounting
policies and practices of FAS 71 include:

o an independent regulator sets rates;
o the regulator sets the rates to recover specific costs of delivering
service; and

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o the service territory lacks competitive pressures to reduce rates below
the rates set by the regulator.

IMPLICATIONS OF DISCONTINUING APPLICATION OF FAS 71

TEP

Upon approval by the ACC of a settlement agreement (TEP Settlement
Agreement) in November 1999, TEP discontinued application of FAS 71 for its
generation operations. TEP continues to apply FAS 71 to its regulated
operations, which include the transmission and distribution portions of its
business.

TEP's regulatory assets, net of regulatory liabilities, totaled $276
million at March 31, 2004. Regulatory assets of $22 million are not presently
included in rate base and consequently are not earning a return on investment.

TEP regularly assesses whether it can continue to apply FAS 71 to its
regulated operations. If TEP stopped applying FAS 71 to these operations, it
would write off the related balances of its regulatory assets as an expense and
its regulatory liabilities as income on its income statement. Based on the
regulatory asset balances, net of regulatory liabilities, at March 31, 2004, if
TEP had stopped applying FAS 71 to its remaining regulated operations, it would
have recorded an extraordinary after-tax loss of $167 million. While regulatory
orders and market conditions may affect cash flows, TEP's cash flows would not
be affected if it stopped applying FAS 71 unless a regulatory order limited its
ability to recover the cost of its regulatory assets.

UES

UES' regulatory liabilities, net of regulatory assets, totaled $2
million at March 31, 2004. This amount includes a $0.2 million asset related to
underrecovered purchased gas costs under UNS Gas' Purchased Gas Adjuster (PGA),
and a $0.8 million liability related to overrecovered purchased power costs
under UNS Electric's Purchased Power and Fuel Adjuster Clause (PPFAC). If UES
stopped applying FAS 71 to its regulated operations, it would write off the
related balances of its regulatory assets as an expense and its regulatory
liabilities as income on its income statement. Based on the regulatory liability
balances, net of regulatory assets, at March 31, 2004, if UES had stopped
applying FAS 71 to its regulated operations, it would have recorded an
extraordinary after-tax gain of $1 million. UES' cash flows would not be
affected if it stopped applying FAS 71 unless a regulatory order limited its
ability to recover the cost of its regulatory assets.

RECENT REGULATORY ACTION FOR UES

In September 2003, the ACC approved a PGA surcharge of $0.1155 per
therm that took effect October 1, 2003. On March 23, 2004, the ACC approved the
termination of the surcharge effective October 31, 2004. At March 31, 2004, the
PGA balance was $0.2 million.

NOTE 4. TEP CREDIT FACILITY
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On March 25, 2004, TEP entered into a new $401 million credit
agreement. The agreement replaces the credit facilities provided under TEP's
$401 million credit agreement that would have expired in 2006. The new credit
agreement includes a $60 million revolving credit facility for general corporate
purposes and a $341 million letter of credit facility, to support $329 million
aggregate principal amount of tax-exempt variable rate bonds. The credit
agreement has a five year term through June 30, 2009 and is secured by $401
million in aggregate principal amount of Second Mortgage Bonds issued under
TEP's General Second Mortgage Indenture.

The credit agreement contains a number of restrictive covenants,
including restrictions on additional indebtedness, liens, sale of assets and
sale-leasebacks. The credit agreement also contains several financial covenants
including: (a) minimum consolidated tangible net worth, (b) a minimum cash
coverage ratio, and (c) a maximum leverage ratio. Under the terms of the credit
agreement, TEP may pay dividends so long as it maintains compliance with the
credit agreement. The previous credit agreement had provided that dividends
could not exceed 65% of TEP's net income. The elimination of such covenant is
expected to satisfy, in part, one of the closing conditions contained in the
acquisition agreement that UniSource Energy entered into with Saguaro
Acquisition

13

Corp. by permitting TEP to dividend all of its net income to its shareholders.
The credit agreement also provides that under certain circumstances, certain
regulatory actions could result in a required reduction of the commitments. As
of March 31, 2004, TEP was in compliance with the terms of the Credit Agreement.

The letter of credit fee of 2.35% on the new facility is significantly
lower than the previous credit agreement's weighted average letter of credit fee
of approximately 5%. The agreement also provides for letter of credit fronting
fees of 0.25%, which will reduce to 0.125% upon the closing of Saguaro
Acquisition Corp.'s acquisition of UniSource Energy; the previous agreement's
fronting fee was 0.25%. Unreimbursed drawings on a letter of credit bear a
variable rate of interest based on LIBOR plus 2.25% per annum. Interest savings
in 2004 will be partially offset by the write-off of fees associated with the
prior facility that were capitalized and being amortized through 2006 and the
amortization of fees associated with the entry of the new facility. TEP
wrote-off $2 million in fees associated with the prior facility in March 2004,
included in Long-Term Debt Interest Expense in UniSource Energy and TEP's income
statements.

If TEP borrows under the revolving credit facility, the borrowing costs
would be at a variable interest rate consisting of a spread over LIBOR or an
alternate base rate. The spread is based upon a pricing grid tied to TEP's
leverage. The per annum rate currently in effect on borrowings under TEP's
revolving credit facility, based on its leverage, is LIBOR plus 2.25%. If TEP's
leverage were to change, the spread over LIBOR could range from 1.50% to 2.25%.
Also, TEP pays a commitment fee of 0.50% on the unused portion of the revolving
credit facility.

NOTE 5. ACCOUNTING CHANGE: ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
- --------------------------------------------------------------------------------

TEP has identified legal obligations to retire generation plant assets
specified in land leases for its jointly-owned Navajo and Four Corners
Generating Stations. TEP also has certain environmental obligations at the San
Juan Generating Station (San Juan). TEP has estimated that its share of these
obligations will be approximately $38 million at the date of retirement. As of
March 31, 2004 and December 31, 2003, TEP had accrued approximately $1 million
for the final decommissioning of its generating facilities. This amount has been
recorded as an accrued asset retirement obligation on the UniSource Energy and
TEP balance sheets.

TEP and UES have various transmission and distribution lines that
operate under land leases and rights of way that contain end dates and
restorative clauses. TEP and UES operate their transmission and distribution
systems as if they will be operated in perpetuity and would continue to be used
or sold without land remediation. A final retirement occurs when an entire
transmission or distribution line is permanently removed from service. Interim
retirements occur as components of the system are replaced. As a result, TEP and
UES are not recognizing the costs of final removal of the transmission and
distribution lines in their financial statements. As of March 31, 2004 and
December 31, 2003, TEP had accrued $62 million and $60 million and UES had
accrued $1 million for the net cost of removal for interim retirements from its
transmission, distribution and general plant. These amounts have been recorded
as a regulatory liability on the UniSource Energy and TEP balance sheets.

Millennium and UED have no asset retirement obligations.

Upon adoption of FAS 143 on January 1, 2003, TEP recorded an asset
retirement obligation of $38 million at its net present value of $1 million,
increased depreciable assets by $0.1 million for asset retirement costs,
reversed $113 million of costs previously accrued for final removal from
accumulated depreciation, reversed previously recorded deferred tax assets of
$44 million and recognized the cumulative effect of accounting change as a gain
of $112 million ($67 million net of tax). The adoption of FAS 143 also resulted
in a $6 million reduction of current depreciation expense charged throughout the
year because asset retirement costs are no longer recorded as a component of
depreciation expense.

NOTE 6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND TRADING ACTIVITIES
- --------------------------------------------------------------------------------

TEP's, UES' and MEG's derivative activities are discussed fully in
UniSource Energy and TEP's 2003 Annual Report on Form 10-K.

TEP has a natural gas supply agreement under which it purchases all of
its gas requirements at spot market prices from Southwest Gas Corporation (SWG).
TEP also has agreements to purchase power that are

14

priced using spot market gas prices. These contracts meet the definition of
normal purchases and are not required to be marked to market. In the first
quarter of 2004, in an effort to minimize price risk on these purchases, TEP
entered into commodity price swap agreements under which TEP purchases gas at
fixed prices and simultaneously sells gas at spot market prices. The spot market
price in the swap agreements is tied to the same index as the purchases under
the SWG and purchased power contracts. These swap agreements, which will expire
during the summer months of 2004 through 2006, were entered into with the goal
of locking in fixed prices on at least 45% and not more than 80% of TEP's
expected summer monthly gas risk prior to entering into the month. The swap
agreements are marked to market on a monthly basis; however, since the
agreements satisfy the requirements for cash flow hedge accounting, the
unrealized gains and losses are recorded in Other Comprehensive Income, a
component of Common Stock Equity, rather than being reflected in the income
statement.

TEP's and MEG's derivative activities are reported as follows:

o TEP's net unrealized and realized gains and losses on forward sales
contracts are components of Electric Wholesale Sales;
o TEP's net unrealized and realized gains and losses on forward
purchase contracts are components of Purchased Power;
o TEP's net unrealized gains and losses on commodity price swaps are
included in Other Comprehensive Income, which is a component of
Common Stock Equity; and
o MEG's net unrealized and realized gains and losses on trading
activities are components of Other Operating Revenues. Although
MEG's realized gains and losses on trading activities are reported
net on UniSource Energy's income statement, the related cash
receipts and cash payments are reported separately on UniSource
Energy's statement of cash flows.

The net pre-tax unrealized gains and losses from TEP's forward
contracts were less than $1 million for each of the three month periods ended
March 31, 2004 and 2003. The net pre-tax realized and unrealized gains and
losses from MEG's trading activities were also less than $1 million for each of
the three month periods ended March 31, 2004 and 2003. The net pre-tax
unrealized gains and losses from TEP's commodity swap agreements recorded as
cash flow hedges and included in Other Comprehensive Income were just over $1
million as of March 31, 2004. TEP had no material cash flow hedges as of
December 31, 2003.

TEP's derivative assets and liabilities are reported in Other Current
Assets and Other Current Liabilities on TEP's balance sheet and in Trading
Assets and Trading Liabilities on UniSource Energy's balance sheet. The fair
value of TEP's derivative assets was $1 million at March 31, 2004 and the fair
value of TEP's derivative liabilities was less than $1 million at December 31,
2003. MEG's trading assets and liabilities are reported in Trading Assets and
Trading Liabilities on UniSource Energy's balance sheet. The fair value of MEG's
trading assets, including its Emissions Allowance inventory, was $49 million at
March 31, 2004 and $22 million at December 31, 2003. The fair value of MEG's
trading liabilities was $44 million at March 31, 2004 and $19 million at
December 31, 2003.

Beginning January 1, 2004, the settlement of forward purchase and sales
contracts that do not result in physical delivery are recorded net as a
component of Electric Wholesale Sales in TEP's income statement. For the three
months ended March 31, 2004, $1 million in sales were netted against $1 million
in purchases, resulting in a small net gain.

NOTE 7. BUSINESS SEGMENTS
- --------------------------------------------------------------------------------

Based on the way we organize our operations and evaluate performance,
we have four reportable business segments:

(1) TEP, a vertically integrated electric utility business, is
UniSource Energy's largest subsidiary.
(2) UES is the holding company for UNS Gas, a regulated gas
distribution business, and UNS Electric, a regulated electric
distribution utility business. See Note 1.
(3) Millennium holds interests in unregulated energy and emerging
technology businesses See Note 8.
(4) UED develops generating resources and other project development
activities, including facilitating the expansion of the
Springerville Generating Station.

15

Significant reconciling adjustments consist of the elimination of
intercompany activity and balances. Millennium recorded revenue from
transactions with TEP of $3 million and $2 million during the three-month
periods ended March 31, 2004 and March 31, 2003, respectively. TEP's related
expense is reported in Other Operations and Maintenance expense on its income
statement. Millennium's revenue and TEP's related expense are eliminated in
UniSource Energy consolidation. Other significant reconciling adjustments
include the elimination of the intercompany note between UniSource Energy and
TEP, as well as the related interest income and expense.

We record our percentage share of the earnings of affiliated companies,
except for investments where we provide all of the financing, in which case we
recognize 100% of the losses. See Note 8.

We disclose selected financial data for our business segments in the
following table:

NOTE 8. MILLENNIUM
- --------------------------------------------------------------------------------

See Note 7 for selected financial data of Millennium.

Through affiliates, Millennium holds investments in unregulated energy
and emerging technology companies. As presented in Note 7, Millennium's assets
represent 7% of UniSource Energy's total assets at March 31, 2004 and 6% at
December 31, 2003. Under the acquisition agreement described in Note 2,
UniSource Energy is limited as to the amount it can invest in Millennium in the
future. Consequently, Millennium's ability to provide future funding for the
operations of emerging companies could be affected.

Millennium accounts for these investments under the consolidation and
equity methods. In some cases, Millennium is an investment's sole funder. When
this is the case, Millennium recognizes 100% of an investment's losses, because
as sole provider of funds it bears all of the financial risk. To the extent an
investment becomes profitable and Millennium has recognized losses in excess of
its percentage ownership, Millennium will recognize 100% of an investment's net
income until Millennium's recognized losses equal its ownership percentage of
losses.

A brief summary of Millennium's investments follows:

GLOBAL SOLAR ENERGY, INC. (Global Solar) primarily develops and
manufactures light weight thin-film photovoltaic cells and panels. Global
Solar's target markets have included military, space and commercial
applications. Millennium owns 99% of Global Solar. Millennium accounts for
Global Solar under the consolidation method and recognizes 100% of Global
Solar's losses. Global Solar recognizes expense when funding is used for
research, development and administrative costs. During the first quarter of
2004, Millennium made no contributions

16

to Global Solar. However, UniSource Energy provided $2 million to Global Solar
under a tax sharing agreement. Millennium has no remaining funding commitments
to Global Solar, other than the tax sharing agreement with UniSource Energy.

INFINITE POWER SOLUTIONS, INC. (IPS) develops thin-film lithium ion
batteries. Millennium owns 72% of IPS and accounts for it under the
consolidation method. IPS recognizes expense when funding is used for research,
development and administrative costs. During the first quarter of 2004,
Millennium funded its remaining debt commitment of $0.5 million to IPS. Dow
Corning Enterprises, Inc. (DCEI) made no additional contributions to IPS during
the same time period. In April 2004, Millennium and DCEI committed to loan up to
an additional $1 million each to IPS, and each funded $0.5 million of the
commitment at that time. Millennium's remaining debt commitment to IPS is
currently $0.5 million and is contingent on IPS' attainment of certain
performance criteria. Pursuant to the terms of the amended promissory notes with
IPS, Millennium and DCEI have the right to convert at any time the outstanding
debt amounts to equity ownership. DCEI holds warrants to purchase additional
preferred shares of IPS that if exercised, could result in Millennium's
ownership of IPS being reduced to as low as 59%.

MICROSAT SYSTEMS, INC. (MicroSat) develops small-scale satellites under
a U.S. government contract. In February 2004, pursuant to a settlement
agreement, the contract was terminated and MicroSat granted the government
purpose rights to the design data and transferred all hardware assets developed
under the contract to the government in exchange for the elimination of further
cost-sharing obligations under the contract. These assets will be used under a
new contract between MicroSat and the government, and may be used by the
government for other satellite development contracts not involving MicroSat.
However, MicroSat retains the right to use the design data on other government
and commercial contracts. MicroSat had previously deferred $2 million, before
tax, of revenues earned under the original contract. These revenues have now
been recognized, and Millennium recorded the income in the first quarter of
2004. Millennium owns 35% of MicroSat and, as sole funder, recognizes 100% of
MicroSat's net losses. Millennium made no contributions to MicroSat during the
first quarter of 2004 and has no further funding commitments to MicroSat.

MEG is a wholly-owned subsidiary of Millennium, which manages and
trades emissions allowances, coal, and related financial instruments. MEG's
activities are described in Note 6.

HADDINGTON ENERGY PARTNERS II, LP (Haddington) funds energy-related
investments. A member of the UniSource Energy Board of Directors has an
investment in Haddington and is a managing director of the general partner of
the limited partnership. Millennium committed $15 million in capital, excluding
fees, to Haddington in exchange for approximately 31% ownership. At March 31,
2004, Millennium had funded $9 million of this commitment, none of which was
funded during the first quarter of 2004. Millennium expects the balance to be
funded over the next three years. In March 2004, Haddington sold one of its
investments and recognized the related gain as income. Millennium's recorded
its share of Haddington's income in the first quarter 2004. In April 2004,
Millennium received a $7 million distribution from Haddington related to the
sale. Millennium accounts for its investment in Haddington under the equity
method.

VALLEY VENTURES III, LP (Valley Ventures) is a venture capital fund
that invests in information technology, microelectronics and biotechnology,
primarily within the southwestern U.S. Another member of the UniSource Energy
Board of Directors is a general partner of the company that manages the fund.
Millennium committed $6 million, including fees, to the fund and owns
approximately 15% of the fund. As of March 31, 2004, Millennium had funded $2
million of this commitment, $0.6 million of which was funded during the first
quarter of 2004. Millennium expects the balance to be funded by the end of 2007.
Millennium accounts for this investment under the equity method due to an
ability to exercise significant influence over the fund based on the related
party affiliation disclosed above.

CARBOELECTRICA SABINAS, S. DE R.L. DE C.V. (Sabinas) is a Mexican
limited liability company created to develop up to 800 megawatts (MW) of
coal-fired generation in the Sabinas region of Coahuila, Mexico. Sabinas also
owns 19.5% of Minerales de Monclova, S.A. de C.V. (Mimosa). Mimosa is an owner
of coal and associated gas reserves. Mimosa supplies metallurgical coal to the
Mexican steel industry and thermal coal to the major electric utility in Mexico.
Millennium owns 50% of Sabinas. Altos Hornos de Mexico, S.A. de C.V. (AHMSA) and
affiliates own the remaining 50%. UniSource Energy's Chairman, President and
Chief Executive Officer is an alternate member of the board of directors of
AHMSA. Since 1999, both AHMSA and Mimosa are parties to a suspension of payments
procedure, under applicable Mexican law, which is the equivalent of a U.S.
Chapter 11 proceeding. Under certain circumstances, Millennium has the right to
sell (a put option) its interest in Sabinas to an AHMSA affiliate for $20
million plus an accrued service fee. These circumstances include failure of
Sabinas to

17

reach financial closing on the generation project within a specified time.
Millennium's put option is secured by collateral initially valued in excess of
$20 million. Millennium accounts for the investment in Sabinas under the equity
method; however, Sabinas accounts for its investment in Mimosa under the cost
method.

NATIONS ENERGY CORPORATION (Nations Energy) is wholly owned by
Millennium. Through subsidiaries, Nations Energy has a 32% interest in a 43 MW
power plant in Panama. Nations Energy intends to sell its interest in this
plant, the book value of which is currently less than $1 million.

NATIONS ENERGY CONTINGENCY

In September 2001, Nations Energy sold its 26% equity interest in a
power project located in Curacao, Netherlands Antilles to Mirant Curacao
Investments, Ltd. (Mirant Curacao), a subsidiary of Mirant Corporation (Mirant).
Nations Energy received $5 million in cash and an $11 million note receivable
from Mirant Curacao. The note was recorded at its net present value of $8
million using an 8% discount rate, the discount being recognized as interest
income over the five-year life of the note. As of March 31, 2004, Nations
Energy's receivable from Mirant Curacao is approximately $10 million. The note
is primarily included in Investments and Other Property - Other on UniSource
Energy's balance sheet. Payments on the note receivable are expected as follows:
$2 million in July 2004, $4 million in July 2005, and $5 million in July 2006.

The note is guaranteed by Mirant Americas, Inc., a subsidiary of
Mirant. On July 14, 2003, Mirant, Mirant Americas, Inc. and various other Mirant
companies filed for Chapter 11 bankruptcy protection. Mirant Curacao was not
included in the Chapter 11 filings. Based on a review of the projected cash
flows for the power project, it appears Mirant Curacao will have sufficient
future cash flows to pay the note receivable and any applicable interest.
However, we cannot predict the ultimate outcome that Mirant's bankruptcy will
have on the collectibility of the note from Mirant Curacao. Nations Energy will
continue to evaluate the collectibility of the receivable, but currently expects
to collect the note in its entirety and has not recorded any reserve for this
note. cover

MILLENNIUM COMMITMENTS

Millennium's funding levels and share ownership are subject to change
in the future. Millennium's outstanding equity commitments are currently limited
to $6 million to Haddington and $4 million to Valley Ventures. Millennium's
only remaining debt commitment is $0.5 million to IPS. Millennium may commit to
provide additional funding to its investments in the future.

Global Solar had commitments totaling $1 million at March 31, 2004 and
December 31, 2003 to incur future expenses relating to government contracts.

NOTE 9. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------

MILLENNIUM COMMITMENTS AND CONTINGENCY

See Note 8 for a description of Millennium's commitments and
contingency.

UNISOURCE ENERGY CONTINGENCIES

Acquisition Fees

UniSource Energy has entered into agreements with New Harbor
Incorporated (New Harbor) and Morgan Stanley & Co. Incorporated (Morgan Stanley)
in connection with the acquisition of UniSource Energy by Saguaro Utility. The
transaction fee payable to New Harbor is $9 million. UniSource Energy paid New
Harbor $2 million upon announcement of the transaction in November 2003, with
the balance of the transaction fee contingent and payable upon the closing of
the transaction. UniSource Energy has agreed to pay Morgan Stanley a transaction
fee of up to $3 million, which includes their monthly advisory fee, in
connection with the acquisition. UniSource Energy paid Morgan Stanley $1 million
in November 2003 and $0.4 million in April 2004 upon shareholders approving the
transaction, and will pay Morgan Stanley $1 million contingent and payable upon
the acquisition closing.

In certain circumstances, in the event of termination of the
acquisition agreement, UniSource Energy would be required to pay Saguaro
Acquisition Corp.'s expenses and a termination fee in an aggregate amount of up
to

18

$25 million.

Withdrawal of Litigation Concerning the Proposed Acquisition Agreement

On March 17, 2004, plaintiffs withdrew two shareholder derivative
lawsuits, McBride v. Pignatelli, et al. and Zetooney v. Pignatelli, et al.,
filed in the Superior Court of the State of Arizona on November 24, 2003, the
same day that UniSource Energy announced details of its proposed acquisition by
Saguaro Utility Group, L.P. UniSource Energy paid no consideration in connection
with the withdrawal of the lawsuits. In these two lawsuits, which were virtually
identical, the plaintiffs alleged that UniSource Energy's Board of Directors, in
its consideration and approval of the acquisition agreement, breached its
fiduciary duty to UniSource Energy's shareholders in approving the acquisition
agreement.

TEP CONTINGENCIES

Springerville Generating Station Complaint

Environmental activist groups have expressed concerns regarding the
construction of any new units at the Springerville Generating Station. In
January 2003, environmental activist groups appealed an ACC Order affirming the
ACC's approval of the expansion at the Springerville Generating Station to the
Superior Court of the State of Arizona. On October 22, 2003, the Superior Court
affirmed the ACC's issuance of the Certificate of Environmental Compatibility
for Springerville Generating Station. The Court granted TEP and the ACC's motion
for summary judgment from the environmental activist groups. The environmental
activist groups appealed the Superior Court decision on December 30, 2003 and
filed an amended notice of appeal on January 2, 2004.

In November 2001, the Grand Canyon Trust (GCT), an environmental
activist group, filed a complaint in U.S. District Court against TEP for alleged
violations of the Clean Air Act at the Springerville Generating Station. The
complaint alleged that more stringent emission standards should apply to Units 1
and 2. These standards would require new permits and the installation of
additional facilities, meeting Best Available Control Technology standards, for
the continued operation of Units 1 and 2. In 2002, the U.S. District Court
granted TEP's motion for summary judgment on one of the primary issues in the
case: whether TEP commenced construction within 18 months and/or by March 19,
1979, after the original 1977 air permit covering Units 1 and 2 was issued. The
Court found that TEP had commenced construction of the Springerville Generating
Station in the time periods required by the original permits. There were two
remaining allegations: that (a) TEP discontinued construction for a period of 18
months or longer and did not complete construction in a reasonable period of
time, and (b) TEP did not commence construction, for purposes of New Source
Performance Standard applicability, by September 18, 1978. On March 4, 2003, the
U.S. District Court determined that the GCT had not commenced the case on a
timely basis and dismissed the case. The GCT has appealed this decision to the
U.S. Court of Appeals for the 9th Circuit. Oral arguement on the matter was
heard by the 9th Circuit on April 15, 2004, and a decision is pending.

TEP believes these claims are without merit and intends to vigorously
contest them.

Litigation and Claims Related to San Juan Generating Station

On May 16, 2002, the GCT and the Sierra Club filed a citizen lawsuit
under the Clean Air Act in federal district court in New Mexico against Public
Service Company of New Mexico (PNM) as operator of San Juan. TEP owns 50% of San
Juan Units 1 and 2, which equates to 19.8% of the total San Juan Station. The
lawsuit alleges two violations of the Clean Air Act and related regulations and
permits. One of the two claims, concerning the initial permitting of San Juan,
was dismissed by the court in August 2003. The remaining claim alleged that PNM
violated its present Title V operating permit for Units 1, 3 and 4 by exceeding
the 20% opacity standard on numerous occasions between 1998 and 2002; opacity is
a means to monitor the particulate matter contained in an emission. PNM was
directed to make a written settlement offer on the remaining cla